Europe Slays Autodesk

by Tom Taulli | August 24, 2012 1:43 pm

Autodesk (NASDAQ:ADSK[1]), which sells design software for engineers and architects, has seen its stock slammed by roughly 15% Friday after a disappointing second-quarter earnings report [2]and third-quarter forecast. And a big part of the blame goes to Europe.

In the second quarter, the company posted a 4.1% increase in sales to $568.7 million, and net income was $64.6 million, or 28 cents a share. Autodesk’s own estimate was for sales of $600 million and profits of 29 cents to 34 cents.

Oh, and the outlook was weak too. The fiscal 2013 sales growth is expected to come to 4% to 6%. The prior forecast was for 10%.

According to the conference call, Autodesk’s CEO noted that the fall-off in demand came in July. Again, a big part was the pullback in Europe. In fact, this is becoming a problem with other top software providers, such as Salesforce.com (NYSE:CRM[3]). With austerity programs taking effect in Europe, IT budges will inevitably get cut.

There was also weakness in Latin America, which has seen lower economic growth. Yet there was continued strength in China and Japan.

But Autodesk suffered from execution issues as well. Keep in mind that the company has been making changes to its organization, such as with its sales segment, and the transition has been rocky.

Autodesk is also moving more aggressively to cloud solutions[4]. While this is a smart move — because it allows for easier updates and improved user experiences — it will still take time to make the change. The costs will also increase because of the need to rewrite lots of software code.

Interestingly enough, Autodesk is also investing heavily in its mobile business. Consider that its AutoCAD WS app for Apple’s (NASDAQ:AAPL[5]) iOS and Google’s (NASDAQ:GOOG[6]) Android has been downloaded more than 9 million times.

In fact, Autodesk recently shelled out $60 million for Socialcam, which allows users to share videos on their smartphones. Why did it do this deal? It’s a head-scratcher. All in all, there seems to be little synergy with the two businesses. Instead, the acquisition looks like a distraction.

Autodesk’s valuation is certainly more attractive now, with a price-to-earnings ratio of 23 times. But this is still high in light of the company’s growth deceleration. Besides, its technology transition will probably not be smooth or quick. So given all these factors, it’s a good idea to keep away from the stock for now.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[7], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling”[8] and“All About Commodities.”[9] Follow him on Twitter at@ttaulli[10]. As of this writing, he did not own a position in any of the aforementioned securities.